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Virginia’s Other New Taxes – hold on to your seats!

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While we have been watching COVID numbers, the Virginia legislature has been implementing its version of the green new deal and healthy living deal.

Most taxes go into effect July 1, 2020 unless otherwise noted.

Gasoline Taxes:
This gets complicated. Statewide increase of 5ยข/gallon. For those outside of Northern Virginia and Hampton Roads, you will join them in paying an additional 7.6 cents/gallon (7.7 for diesel). So the statewide gas tax is now 28.8 cents/gallon. On July 1, 2021 they go up another 5 cents per gallon. On the same date Diesel goes up another 6.8 cents/gallon. Starting on July 1, 2022, state gasoline and diesel tax increases will be index to the consumer price index.

Cigarettes/Tobacco:
The State really wants you to quit smoking. They are doubling the cigarette tax from $3/carton to $6/carton.
And it gets worse. Other tobacco alternatives such as pipe tobacco, snuff and chewing tobacco goes up to 20%. And Vaping products now have a 6.6 cents per milliliter tax.
Starting July 1, 2021, localities without a local cigarette tax may impose one and they can’t exceed $2/carton.

Meals:
Those with meals taxes (except if they had a referendum which failed in the last six years) can raise them from 4% to 6%.

Entertainment Taxes:
Counties may impose taxes on entertainment admissions (as if after COVID anyone goes to the movies).
Game of Skill machine has a license fee of $1,200 per machine to pay for COVID expenses (don’t bet on it ever going away).

Local Sales and Use Taxes:
The following localities are authorized to call referendums on increasing their sales and use taxes an additional 1% to pay for school projects. They are Henry, Charlotte, Halifax, Mecklenburg, Pittsylvania, Gloucester and Northampton counties, and the City of Danville.

Peer to Peer Vehicle Sharing:
Starting October 1, 2020, there will be a new tax for this. Sort of like renting out your own car to others.

Plastic Bags:
Beginning January 1, 2021 the dreaded plastic bag will incur a 5 cent tax for localities.

Electricity:
Electricity Generators will pay a carbon tax starting January 1, 2021, the amount will be set by auction. This will be passed along to consumers along with another tax from the state a usage tax to be set by the State Corporation Commission.

Transient Occupancy Taxes:
For those counties not charging them, will be authorized to do so starting May 1, 2021.

Authors and C Corporations

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The Tax Act of 2017, lowered corporate tax rates to 21%. The maximum personal tax rate is 35%. Depending on the state you live in, an author may be better off forming a C Corporation and taking reasonable salaries and later dividends and let profits grow inside of the C Corporation. Why? First the negative, money taken out of a C corporation as a dividend is taxed twice. So, if you pay a small salary and take out a dividend you pay double tax once at the corporate level and once when you take out the dividend. You also get to have retirement plans, health plans, health savings accounts. And if that isn’t enough, C Corporation profits invested in US Corporations receive a 50% exclusion for US Dividends. So, let’s do a what if:
What if you made $1 Million in book royalties in one year?
Corporation income $1,000,000.
Salary $275,000 to owner
Expenses for health insurance:
$25,000
Expenses for Retirement $30,750.
Expenses for Corporate Car: $30,000.
Rent from family member: $36,000
Taxable corporate income = $603,250.
Tax Federal: $126,682.
Individual: $66,000
FICA/Medicare = $21,070 combined.
Total tax hit: $213,572.

Individual comparison:
$1 Million income
Expenses for health insurance:
$25,000
Expenses for Retirement $30,750.
199A deduction $18,000
Taxable individual income: $926,250.
Tax: $267,075
Self-Employment Tax: $30,512.
Total Federal Tax: $297,587.

Savings: $84,015.

Year 2. Assume no new income:
$587,000 invested at 4% = $23,480
Taxable amount $11,740.
$275,000 salary;
Federal Taxable income: -$273,795
Loss carryback: 273,795
Refund: = $57,497.
Individual tax:
$66,000
FICA/Medicare $21,070 combined.
Net hit: $29,593.

As you can see for an author who has a large income in a given year, this process can be a great benefit.

COVAD-19 payments

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The payment of $1,200 ($2,400 for joint filers) is calculated from your most recent tax return. If your adjusted gross income was above $75,000 ($150,000 for couples) the $1,200 payment is reduced by $50 for every $1,000 your income exceeds the limit above. For example is a couple makes $200,000. That’s $50,000 more than the limit. So, $50 x 50 = $2,500. So, no payment. On the other hand if they were at $175,000, then the reduction is $1,250 and they would get their $2,400 reduced by $1,250. So, what year do they look at? The calculation year is the last filed year, but it is trued up after your 2019 tax return is filed. So, if you had lower income in 2018 and higher income in 2019, you might get a bigger check, but will owe some or all of it back at the end of the year. On the other hand if your income in 2019 was lower than 2018, then it would behoove you to file ASAP. The payment will offset anything you might owe this year in taxes. Needless to say, it will be a headache for the next year.

Lots of Tax Changes – Let’s start with FMLA

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You have an employee who either catches COVID-19 or cares for someone with COVID-19, or is quarantined due to COVID-19 exposure, or who has to keep the kids because school and daycare are gone. Under the Families First Coronoavirus Response Act, you get two things: (1) a credit up to 100% of employer share of medicare and FICA taxes capped at $511 per day or $200 per day of wages paid depending on the reason for the absence. There is also a 10 day per quarter limit. This includes health plan payments as well. The credit is refundable and reduces income. Further, employer still gets the employer FICA and Medicare deduction even though its given back to Employer. The same rules apply for self-employed individuals as well and can be used to reduce self-employment taxes as well.
Additionally, the Medicare and FICA tax paid by employers is also permitted for FMLA leave paid during the quarter up to $200 per day plus health plan expenses paid during the quarter. This credit is limited to 10 weeks. However the credit under this provision is taxable as income, but its offset by these expenses. Again the same rules apply for self-employed individuals.
Also any wages paid to the employee under this Act will not be subject to employee Medicare and FICA tax.
This is being amended as we speak in the current bill before Congress.